Confidence is currency Zim needs

By Joram Nyathi

JOICE Mujuru, the leader of Zimbabwe’s People First opposition party, last week lost a Constitutional Court challenge against the planned introduction of a new surrogate currency called bond notes at the end of the month. The apex court said Mujuru had jumped the gun by challenging what did not yet exist. In the event, there was no way she could explain to the court how her rights or the national Constitution would or had been be violated, pointed out Chief Justice Godfrey Chidyausiku, sitting with eight other judges.

The court ruled: “After considering papers filed in this matter and submissions by counsel, the court is satisfied that this application is premature and speculative. It is hereby dismissed with costs.”

The ruling stoked the anxieties and fears of those who have sought to discredit the bond notes as government’s way of trying to reintroduce a local currency following the official demonetisation of the Zimbabwe dollar.

Reserve Bank governor John Mangudya first announced in May this year plans to introduce bond notes of various denominations to be exchanged on a one-on-one rate with the anchor American dollar. He said the bond note would not replace the current multicurrency system adopted in 2009 after the local unit was gutted by runaway inflation.

The timing of the announcement couldn’t have been worse. The nation was experiencing a shortage of mainly US dollars which anchors a nine-currency exchange system which includes the South African rand, Botswana pula, British pound sterling, Chinese yuan and Indian rupee. There were suspicions that the government wanted to use the bond notes to replace the multicurrency regime to end the liquidity crunch.

There were howls of protests at the news from politicians, industry, civic society organisations and economists. Opposition politicians went so far as to push for nationwide demonstrations against the proposal. It was clearly an issue of mistrust more than reality because so far there are no bond notes, which will only be launched at the end of October after the highest court of appeal, the Constitutional Court, ruled that so far those challenging their introduction are acting on speculation.

Mangudya explained during his Mid Term Monetary statement last month that the bond notes would not be forced on people and that they were not replacing the multicurrency system. Instead, he said, the primary purpose of the bond notes was to pay incentives to producers to export more to boost the country’s foreign exchange reserves.

The central bank governor has stated repeatedly that the bond notes will be backed by an Afreximbank loan to the tune of US$200 million, which would be an insignificant three percent of money in circulation even if all of it were immediately turned into the surrogate currency. What that means is government cannot print more than the guaranteed amount. To further assure the public, Mangudya said an independent board would be established to exercise oversight on how much money was in circulation.

Initially, the bond notes will be issued in denominations of the equivalent to US$2 and $5 by the end of October. It is forecast that the equivalent of US$75 million should be in circulation by the end of December this year, depending on the level of exports.

But Mangudya’s fight is not over. His detractors want him to release the US$200 million into the market to ease the liquidity situation. Only then will they be comforted.

Unfortunately, that is not likely to happen. The government argues that there has been a lot of externalisation of foreign currency ever since Zanu PF won the July 31, 2013, harmonised elections (some put the figure at more than US$3 billion). The government also argues that its detractors wanted a predetermined outcome in those elections and want to cause instability through a cash crisis.

It was therefore argued that releasing the US$200 million onto the market would not stem the illicit outflow of money. If anything, much of it could be siphoned out in a matter of days. Bond notes can only be used in Zimbabwe just like other regional currencies which serve domestic uses only. That way, there will be few liquidity shocks in the market.

The normal channels remain open for those who want to import essentials. They apply to the banks explaining what they want to import. The banks will use basic criteria which are used in the region to determine how much to grant in foreign currency if the imports are justified. That way people cannot easily withdraw forex for purposes of externalisation.

Along with these stringent conditions, Zimbabweans have been encouraged to use plastic money in the form of debit and credit cards and the real-time gross settlement transfer system for big transactions, instead of withdrawing hard currency.

Despite initial resistance, people have largely adapted to the reality on the ground due to shortages of cash. Most major retailers have installed point of sale machines in their outlets. While this is standard in developed countries, it’s a new phenomenon fast becoming trendy in Zimbabwe.

There was similar initial resistance when the Reserve Bank introduced bond coins more than a year ago to deal with a shortage of small change in shops and commuter omnibuses. Once they were accepted, the same market started rejecting the South African rand, which had been the preferred small currency.

The government is hoping for similar good fortune with the proposed bond notes. Their acceptance and eventual domestication in the market will depend on the government keeping its hands off the printing press. That is important to avoid speculative attacks on the bond notes once people feel there is room for arbitrage, just as they do on the streets between the rand and the US dollar.

The government would also not want to discredit the independent board that will oversee the bond notes in circulation. That will destroy the tenuous trust that still lingers in the market.

The chief executive officer of the Zimbabwe Chamber of Commerce, Chris Mugaga, said they had accepted the bond notes although there was need for extensive education of the public on how they would work. He said: “We’ve already embraced the bond notes. What’s left now is for the governor to explain how the bond notes are going to be introduced on to the market and how they will be applied.”

Confederation of Zimbabwe Industries vice president Sifelani Jabangwe said there was no need for public panic about the impending introduction of the bond notes.

“The public should not panic as they have not seen how they (bond notes) will operate. According to the government, they will constitute only three percent of the currency in circulation and will not replace the multicurrency system.”

It would be in government’s interest to earn the faith of a sceptical public.